- Key insight: An international standard-setting body has compiled its first report on how financial institutions should deal with artificial intelligence-related risks.
- Expert quote: "We need to ensure these practices support responsible innovation across the financial system while maintaining appropriate safeguards, especially for higher-risk applications." — Michelle Bowman, Federal Reserve vice chair for supervision.
- Forward look: Bowman invited banks and other stakeholders to provide comment on the report's findings.
The Federal Reserve's top regulator said she is steering global regulatory standards around artificial intelligence toward a framework that is tailored based on bank size and riskiness.
Fed Vice Chair for Supervision Michelle Bowman addressed the topic of AI while introducing a new report on best practices for AI adoption from the Financial Stability Board — a transnational regulatory policy group — on Tuesday morning.
Bowman, who chairs the FSB's Standing Committee on Supervisory and Regulatory Cooperation, said the report emphasizes the importance of AI-related regulatory policies being tailored by size of bank and risk-profile of the underlying activity.
"In the report, we emphasized that lower-risk uses of AI should receive a lighter supervisory and regulatory touch," she said, adding that "what works or is a consideration for larger institutions using AI in complex applications is not appropriate for smaller institutions with less complex AI uses."
Bowman said she has emphasized the importance of fostering innovation in her work at both the Fed and at the FSB, noting that the report "provides clear guidance to all institutions" looking to build out products, services and operational functions that use AI.
"We have seen a noticeable increase in the use of AI by banks of all sizes, and we have seen a variety of use cases," Bowman said, noting that the Fed has been monitoring U.S. bank use of AI for nearly a decade. "Our focus has been on supporting institutions that want to innovate responsibly by leveraging AI tools in their operations. Our work in the U.S. has helped to inform the FSB's report."
The report was released during a virtual outreach event hosted by the FSB with the intent of getting feedback from financial institutions and other stakeholders. She noted that the Treasury Department and the Securities and Exchange Commission also contributed to the report.
Bowman was light on the report's specific findings and suggestions in her prepared remarks, but she did highlight the rapid evolution of the technology and its banking applications in recent years.
Bowman said the report was merely the first step in the FSB's push to create global guidelines for AI. She urged banks to provide feedback tied directly to the types of AI use cases they are deploying or hoping to deploy.
She called for respondents to identify safety and soundness practices that are "too prescriptive" as well as ones that "fail to adequately account for differences in institutional size, complexity, and risk profile." At the same time, she solicited input on where the document does not give enough clarity on how to address material risks.
"We need to ensure these practices support responsible innovation across the financial system while maintaining appropriate safeguards, especially for higher-risk applications," she said.
